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WillScot Mobile Mini Holdings (WSC), a flexible workspace and portable storage provider, is not seeing much movement today after announcing plans to acquire McGrath RentCorp (MGRC), a business-to-business rental company, for $3.8 bln. MGRC shareholders would receive either $123.00 per share in cash or 2.8211 shares of WSC. The offer represented an approximately 10% premium to the previous trading day's closing price. With MGRC trading roughly on par with WSC's price offer, the market is confident that the deal will close, which is expected in 2Q24.

Even though WSC lacks much conviction today, there is plenty to like from its purchase of MGRC.

• WSC gobbles up a key competitor within the modular space and portable storage, especially around major markets in the U.S., including California, Texas, and Florida, where MGRC commands an imposing presence.
• Management estimates that the merger will result in approximately $700 mln of combined free cash flow in 2025, nicely ahead of WSC's trailing twelve-month free cash flow of just over $500 mln as of Q3. WSC also noted that it had already identified $50 mln in pre-tax operating synergies.
• The price tag was not too troubling, valuing MGRC at approximately 4.6x estimated FY23 revenue. MGRC has also been expanding revs by at least a double-digit percentage yr/yr for eight consecutive quarters, underscoring healthy demand for temporary space. WSC added that the combination would be accretive to its EPS within the first year post-closing, with significant upside after that.

We think a WSC/MGRC merger makes sense. WSC is picking up a competitor for a reasonable price given the market fortification and potential upside from capitalizing on underpenetrated verticals like education, government, and healthcare. There are still challenges on the horizon; WSC's business heavily depends on non-residential construction activity, given how that industry relies on temporary storage. Early outlooks for this market paint a cloudy picture, with forecasts modeling a roughly flattish demand environment yr/yr. However, WSC noted in October that if non-res construction activity can stay stable at 2023 levels, it would classify it as a very healthy environment. With interest rates set to decline this year, WSC could be staring at the beginning of a long-lasting tailwind if it spurs outsized activity within the construction markets.